Retirement Benefits: Understanding the Old Age Security (OAS) Pension

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The Old Age Security (OAS) pension is one of the three main pillars of Canada’s retirement income system. The two other pillars are the Canada Pension Plan (CPP) and Employment Pension Plans/Individual Retirement Savings.

The universal OAS pension is a taxable monthly payment available to seniors who are aged 65 and older and who meet the eligibility requirements. Unlike the CPP, Old Age Security benefits are not tied to your employment history. You may be eligible to receive the OAS pension even if you have never worked or are still employed.

In addition to the universal OAS pension, there are three other benefits that low-income seniors may also qualify for: The Guaranteed Income Supplement, Allowance and Allowance for the Survivor. I discuss them in a separate article.

How Much OAS Benefit Will You Receive in 2018?

The amount you will receive on a monthly basis depends on how long you have lived in Canada after turning 18.

To qualify for a full OAS pension, you must have lived in Canada for at least 40 years after age 18. You will receive a partial pension benefit if you haven’t resided in Canada for the full 40 years. The partial pension benefit is 1/40th of the full pension amount for each complete year you lived in Canada after age 18. For example, if you had lived in Canada for 20 years as an adult, you may qualify to receive 20/40th or one-half of the full benefit.

OAS benefits are adjusted quarterly in January, April, July, and October based on the prevailing Consumer Price Index. For the first quarter of 2019 (i.e. January to March), the maximum monthly OAS benefit is $601.45.

OAS Deferral Option

Since July 1, 2013, individuals can voluntarily defer their OAS pension for up to 5 years after the date they become eligible. This deferral will make them eligible for a higher monthly pension later. For every month the OAS is deferred, the monthly pension amount increases by 0.6% up to a maximum of 36% at age 70.

OAS Clawback

Officially known as the OAS recovery tax.

Your OAS benefit may be reduced by a clawback if your net income for the previous calendar year exceeds $74,789 (2017), $75,910 (2018), and $77,580 for 2019. If your net income exceeds this amount, you must pay back 15% on the excess income up to a maximum of the total OAS benefit received. This deduction is like an additional 15% tax on top of your current tax rate.

OAS clawback example: For example, for the 2017 year, the income threshold was $74,789. If your net income was $85,000, the excess of $10,211 would trigger a clawback of $1,531.65 (i.e. 15% x $10,211). This would result in a monthly reduction in OAS benefits of $127.64 for the July 2018 to June 2019 period.

For the January to March 2019 quarter, if your net income exceeds $125,696, your OAS benefit will be reduced to zero.

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How To Minimize OAS Clawbacks

A few strategies that may be deployed to limit OAS clawback if applicable include:

Income Splitting: Splitting eligible pension income including workplace pensions, RRIF, and utilizing spousal RRSP’s. This can lower individual spouses’ overall income and limit or eliminate OAS clawback.

Defer OAS/CPP: Seniors can defer OAS pensions for up to 5 years from when they are eligible. CPP can be deferred as well. However, note that deferring OAS or CPP will increase your benefits later down the road and could then trigger OAS clawbacks at that time. In some cases, taking CPP much earlier may be a better option.

Prioritize TFSA Contribution: Income generated from investments in a TFSA are not taxable and do not count towards your net income.

Utilize RRSP Contribution Room: You can contribute to an RRSP until the end of the year in which you turn 71. If you have unused RRSP contribution room from previous years or still have employment income, contributing to an RRSP will lower your net income for OAS calculations. Making spousal RRSP contributions will achieve the same result.

Optimize other Investments: Interest income from Guaranteed Income Certificates, savings, etc., are taxed fully. Dividends are grossed up (138%) and may push your income over the maximum threshold. Only 50% of capital gains are included in taxable income.

If you have questions about your Old Age Security pension, you can contact Service Canada’s phone number at 1-800-255-4786.

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Hi & thanks for the useful information, so if I am a citizen for 37 years and spent 17 years out of the country the calculation will be 18/40 =%45 of the full benefits? Please correct me if I am wrong thanks.,